Apple and Exchange Rates

Over at The Economic Policy Institute Blog, Josh Bivens thinks something is missing in the big New York Times story on why Apple makes stuff in China instead of America:

Yes, I’m gettingboring on this topic, but, exchange rates are by far the single most important determinant of U.S. trade performance, so if the question is “why isn’t X made in the US anymore,” it’s very likely that the answer remains “the dollar is overvalued.”

The main point of the New York Times story was that differences in hourly wages are not the primary driver of Apple’s production in China, but rather the available scale, flexibility, supply chain, and the quantity of appropriate labor available. Given that they are specifically countering the notion that wage differences are the issue, it seems quite besides the point to reply that the determinants of wage differences are being ignored.

Something we learn from the article is that you should think of Apple’s decision in terms of the labor supply curve for the type of labor they want. It is highly concentrated, medium skilled workers that can scale up extremely quickly. This means they don’t just have to consider the point where they expect their labor demand curve to cross the labor supply curve, but also how quickly the supply curve slopes upward just to the right of equilibrium, since their costs will be determined by average wages along a section of the supply curve. That is to say the shape of the short run labor supply curve matters a lot.

One advantage in China seems to be that it is much cheaper to move quickly along the supply curve. Huge supplies of flexible labor like that don’t exist in the U.S. without offering enough pay to lure them from all over the country. In fact laws here prevent the sort of flexibility you can get in China. This means that when you scale up labor quickly in the U.S., increasing the number of workers must take up relatively more of the slack than increasing worker hours hours. Their labor supply curve is much flatter where they need it to be, and exchange rates aren’t going to flatten the labor supply curve in America.

“The main point of the New York Times story was that differences in hourly wages are not the primary driver of Apple’s production in China, but rather the available scale, flexibility, supply chain, and the quantity of appropriate labor available.”

Well, that may explain why they are producing in China instead of some other low wage country. It doesn’t say much about China versus the U.S. or Japan or Germany etc.

The article says:
Huge supplies of flexible labor like that don’t exist in the U.S. without offering enough pay to lure them from all over the country.

Isn’t this (at least partially) an issue of pay ? If the dollar was undervalued enough, you could offer enough pay. I guess we have labor rules so you can’t, at some point, make workers work more; but in most cases, you CAN, you just have to pay more per hour, right ? So it CAN be reduced to $/hr, isn’t it ?

«I guess we have labor rules so you can’t, at some point, make workers work more; but in most cases, you CAN, you just have to pay more per hour, right ? So it CAN be reduced to $/hr, isn’t it ?x

It can be always reduced and quite directly to $/hr.

USA industries used to solve Apple’s problem with 3 8h shift per day, as a commenter on another blog noted. Very similarly German industries when there was massive turkish immigration to Germany, or english industries when there was massive Scottish or Irish immigration to England.

Chinese workers are just desperate for jobs at 0.70$/h, so they are willing to work over 2x 12h shifts, and to stand by outside the factory gates as unpaid reserve workers hoping to get some temporary jobs.

And when US Steel and Ford were willing to pay for 3x 8h shifts per day, lots of people moved from as far as Europe and China itself to get jobs there.

Funny stories about “That is to say the shape of the short run labor supply curve matters a lot” are just euphemism for “their people are desperate for very low paid temporary jobs”.

The conclusion that you simply cannot compete with $0.70/h wage rates at any plausible exchange rate may still be valid though.

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